Good day, and welcome to the DigitalOcean Q1 '25 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Melanie Strate, Head of Investor Relations, to begin the conference. Melanie, over to you.

Thank you, and good morning. Thank you all for joining us today to review DigitalOcean's first quarter 2025 financial results. Joining me on the call today are Paddy Srinivasan, our Chief Executive Officer; and Matt Steinfort, our Chief Financial Officer. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. Our actual results may differ materially from those projected in these forward-looking statements, including our financial outlook. I direct your attention to the risk factors contained in our filings with the SEC as well as those referenced in today's press release that is posted on our website. DigitalOcean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be discussed on the conference call and reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release as well as in our investor presentation that outlines the financial discussion on today's call. A webcast of today's call is also available in the IR section of our website. And with that, I will turn the call over to Paddy.

Thank you, Melanie. Good morning, everyone, and thank you for joining us today as we review our solid first quarter 2025 results. The top line growth momentum we generated in 2024 continued into Q1, and the results provide further evidence of our continued execution of our strategy. This strategy, as outlined on Slide 4 of our earnings presentation, includes scaling with our digital native enterprise customers by helping them run large and complex workloads on our cloud platform, and continuing to democratize the access of AI for both new generation AI-native startups as well as for our existing 600,000-plus customers. I'm very pleased to share today the excellent progress we are making on both of these strategic priorities. My comments today will include a quick recap of our first quarter results, details on the progress we are making for our customers as we invest in product innovation and go-to-market for both core cloud and AI platforms and a quick summary of the progress we are making on our financing strategy that Matt will detail later in the call. Let me start with the first quarter financial results and turning to Slide 5 of our earnings tab. We had another solid quarter as revenue growth increased in the first quarter to 14% year-over-year to $211 million with our AI ARR continuing to grow north of 160% year-over-year. Q1 net dollar retention rate, or NDR, improved 100% for the first time since Q2 of 2023, and we expect NDR to remain in a similar range as the last Two quarters for the remainder of the year. In addition, we made further progress with our continued focus on our higher spending digital native enterprise customers, increasing revenue from customers who are at $100,000 plus annual run rate up 41% year-over-year and to 23%…

Thanks, Paddy. Good morning, everyone, and thanks for joining us today. As Paddy discussed, we are very pleased with our Q1 2025 performance as we continue to execute against our key strategic priorities and deliver strong financial results. In my comments, I'll walk through our Q1 results, provide an update on our balance sheet and financing strategy and share our second quarter and full year 2025 financial outlook. Starting with the top line. Revenue in the first quarter was $211 million, and annual run rate revenue, or ARR, was $843 million, both up 14% year-over-year. We added $23 million of incremental ARR in the quarter, which is 50% higher compared to incremental ARR in the same quarter last year. We continue to focus our product innovation and go-to-market investments on our digital native enterprise customers, and the momentum we have generated with the target customer base continues to grow. In Q1, revenue from our customers whose annualized run rate revenue in the quarter was greater than $100,000, who we refer to as Scalers+ and who represent 23% of overall revenue grew 41% year-over-year with a 27% year-over-year increase in customer count, as our largest customers continued their strong adoption of our core cloud and AI products. Q1 revenue growth was driven by improvements in both customer acquisition and customer expansion. The enhancements we've made to our product-led growth engine are paying off in improved customer acquisition with revenue growth from customers in their first 12 months on our platform continuing to accelerate in Q1. Our product innovation and go-to-market efforts are also having an impact on customer expansion as our Q1 net dollar retention ticked up to 100%, up from 97% in the same quarter last year, which is a major accomplishment as we have largely eliminated the net expansion…

[Operator Instructions] Your first question comes from the line of Jason Ader from William Blair. Your line is open.

Thank you. Paddy, just on the GenAI platform, can you give us a sense of when it's expected to be generally available? I know it's still essentially like the beta situation now? And then just related to that, you talked about sort of the differentiated AI opportunity for DigitalOcean. Can you just walk us through how you think about DigitalOcean's differentiation within that AI landscape? Thank you.

Thank you, Jason. On your first question, yes, the GenAI platform, we announced in January and we have been progressively adding a lot of new features while still in private beta and public data now, we expect to go live sometime by end of Q2, beginning of Q3, it's just a function of how many additional capabilities we can add to the platform, making it super comprehensive for customers to be able to deploy real-world agentic workloads on it. I gave several examples of companies that are leveraging it in production environments today, and we're getting excellent feedback from customers, both our existing customers as well as new AI native start-ups and companies that are giving us excellent feedback. So -- and I gave the -- some count as well in terms of 5,000 customers, 8,000 agencies are tremendous numbers for a product that is not even in GA currently. So we're super bullish about the future of the GenAI platform, and we feel our full -- the second part of your question was what is our strategy and differentiation from an AI perspective. So I've been talking about our IPA stack, infrastructure platform and applications. And as I outlined in today's call, we are making good progress on all three layers. The best part about our infrastructure layer is that a majority of the workloads that we are seeing now are on the inferencing side. And what is important to understand on the inferencing layer is that it is powering real-world use cases rather than just proof-of-concept or experimentation, which means it is serving the needs of end users, either in a B2B scenario or B2C scenario. So, I strongly believe that with our infrastructure capabilities today, both on AMD and NVIDIA, we are differentiating ourselves in our ability…

Your next question comes from the line of Pinjalim Bora from JPMorgan. Your line is open.

Great. Thank you. Congrats on the quarter. Paddy, maybe talk about just what are you seeing from a macro standpoint? Obviously, there's a lot of uncertainty over there. But so far in April in Q2, are you seeing any change in customer buying behavior or any change in the top of the funnel? Are you seeing people deploy any cloud optimization efforts back again, both domestically and internationally?

Great. Pinjalim, thank you for the question. I'll give you the answer first. Whatever we are observing is reflected in our outlook that Matt talked about. So, let me take a step back and remind everyone that our customers are digital native enterprises, right? And we had really solid evidence in Q1 that our strategy around the digital natives around builders, Scalers, Scalers+, it's growing really robustly at 16%. And for digital natives, cloud is a top line driver, right? And we have very clear visibility into customer usage on a daily basis, we monitor several utilization trends across the world. And we are seeing some pockets of customers that have unique impacts on their business. So for example, AdTech is a vertical that we have seen that is a little bit more in a heightened sense of cautiousness. But as you know, we don't have any vertical, geographic or even customer concentration. So whatever we are seeing is baked into our outlook. And to the second part of your question, Pinjalim, we have several leading indicators we look at. We look at the usage patterns of our large customers. We look at the usage patterns of the long-tail of our customer base. We look at the top of the funnel in terms of new business acquisition through our self-service funnel. We look at the pipeline that is being generated by our sales team, but also from our partners. We look at our AI demand. And from what we can see, we have taken a very appropriately cautious approach to projecting the outlook for the rest of the year because we don't know exactly how things are going to unfold. But given our -- the lack of concentration of our customers and geography and vertical segments, we feel fairly confident in our full year guidance.

Your next question comes from the line of Gabriela Borges from Goldman Sachs. The line is open.

Hi, good morning. Paddy, Matty, thanks for the details. I'm observing a shift in how you're talking about the business from being mostly reactive to being a little bit more predictable and larger deals. So, maybe talk to us a little bit about the $20 million multiyear deal that you signed in particular. How do you think about the potential for more deals like that? And what does the conversation look like given how quickly AI is changing and inference in particular, is evolving, how do you get to the point where a customer is comfortable committing to you long-term? What sort of roadmap discussion is that? Thank you.

Yeah. Thank you, Gabriela. Great question. So, yes, as I mentioned in my prepared remarks, we are having a lot of add-backs with these larger digital native enterprise customers. And the example that I quoted, we'll have more details as we start working on the implementation of that customer commitment. But taking a big step back and looking at the overall landscape, these conversations that we are having with customers for multiyear large commitment contracts is both on AI inferencing as well as on core cloud. I think a lot of the functionalities that we have released and the one specifically that I highlighted this earnings call, are all lending themselves to having these kinds of conversations and giving our customers confidence that they can now move larger workloads to our platform without having to be all or nothing. So, the Partner Connect functionality, I specifically mentioned how it enables staged migration, where you can run parts of the workload in multi-cloud scenario and move some of the heavier workloads to DigitalOcean in a staged manner. There are so many other things we are doing both on the core infrastructure side, but also in our Platform as a Service with DOKS now scaling to 1,000 nodes, larger storage and database capabilities with our MySQL and PostgreSQL. So it is a collection of all of these things, plus the continuing maturity of our go-to-market motion. That is why I specifically called out the webinars case studies even though they may be -- they may sound very obvious and natural for a company like us to be doing that, these are some new muscles that we are exercising and also the enterprise sales portion that we now have, putting our arms around our biggest customers and really give them true onboarding experience. So, it's a collection of all of these things that are giving us better add backs. And of course, as the quarters go by, we are getting better and better at converting a lot of these things. And I just wanted to bring attention to it that this is not a blue bird by any stretch. We are actually starting to see these kinds of deals. And hence, we are also evolving our thinking in terms of what we need to build, how we need to support it, how we should sell these capabilities. And Matt talked about how we should be financing these things going forward. So it is a whole company kind of conscious push towards getting more predictability into our platform, especially as we scale with the larger digital natives.

Your next question comes from the line of James Fish of Piper Sandler. Your line is open.

Hey, guys. Just wanted to build off of Gabriela's question a little bit there. But with the increase -- with the need to increase capacity for new customers coming on, Matt, how are you thinking about CapEx investments for the year? And how much ARR is in the pipeline for these large strategic deals for the year that requires this level of CapEx investments that have you kind of having to weigh all these options beyond just refinancing the $1.5 billion really?

Good question, Fish. The CapEx that we accelerated into the first quarter and that we front-loaded into the first quarter was primarily around getting Atlanta data center up and -- which gave us a tremendous amount of capacity. That capacity is what underpins the growth projection and the revenue outlook and the incremental ARR for 2025. And as Paddy indicated with that one large customer, we have the opportunity to fill it in in chunks as well as using kind of the more on-demand AI capabilities with our GPU droplets and other capabilities around the GenAI platform. So as we think about the CapEx requirements going forward, again, we're very comfortable with the estimates that we had in the capital we need for this year and the revenue projections that we have for this year. But as we think about it over a longer period of time, you got to come back to the fact that we are very, very focused on driving revenue growth and doing so while generating strong free cash flow margins. And as we think about some of the lumpier potential needs for the -- for capital around that when we win some of these bigger customers, that's why we're thinking about tools like, hey, well, we could -- we can lease some of the incremental gear if it accelerated our growth beyond what we're already contemplating because we can fund what we're already contemplating very cleanly within the free cash flow margins that we've articulated. But as we see bigger and bigger opportunities, we want to make sure that we have the flexibility to pursue those. And so we'll add some financing tools to our toolkit to be able to accommodate that, so that we can both accelerate growth and not only maintain but even potentially improve the free cash flow generation of the business.

Your next question comes from the line of Tom Blakey from Cantor. Your line is open.

Hi, thanks for taking the question, and congratulations on the uptick in demand here, maybe. Just building off of Mr. Fish questions here. What kind of changed from the April 4th Analyst Day in terms of what you're seeing in the market, timing, I think, from an element would be helpful here? What type of like uptick in accelerated growth in the out year, like are you kind of seeing from this uptick? And what would the makeup be? Would it be more recurring revenue or would it be more consumption based from the GPU base? Just a lot more color there just in terms of this. What are you seeing in terms of an uptick of these large deals and potential needs for increasing this CapEx? That would be helpful. Thank you.

What I'd say is -- and I'll tie back to what Gabriela has asked earlier, which is we're now at a point -- we've got through Investor Day, we've got a lot of the AI capabilities in place. We're observing the rapid changes in the market and the shift towards inferencing. Majority of our AI revenue right now is inferencing. And again, we feel very good about the near-term outlook of business despite the economic kind of uncertainty. But as we think about '26 and '27 and beyond, and we think about, okay, how do we position ourselves to take advantage of even accelerating the growth beyond what we articulated at Investor Day, we're just thinking like, what are the physics of that and how would we do that? And how would we both take advantage of some of these larger, lumpier deals while maintaining our free cash flow or even improving it. And that's why we're thinking about the -- some of these other structures. And so the demand, as one, we didn't have the Atlanta data center until just recently, literally in the last month or so. And so a lot of the bigger opportunities, we didn't have the ability to win those because we didn't have capacity available. And so for us, as we've turned that capacity up, we've been able to get a big win already. That's what's really accelerating the thinking about, okay, well, we feel good about 2025, but we got to start planning and thinking about the ways in which we can position ourselves to grow beyond what we had communicated at Investor Day in 2026 and beyond. And that's why we're considering the things that we're considering.

Your next question comes from the line of Kingsley Crane from Canaccord Genuity. Your line is open.

Hi, thank you. On the named account engagement model, how many accounts have you targeted today? And then how are you evaluating expanding that program to more prospects as you continue to see nice expansion results with those customers?

Yeah. Hi, Kingsley. So, right now, we are targeting our top 3,000 spenders, and that list has expanded, as I mentioned, from last year, we covered 1,500 exiting the year. So we just expanded coverage. So we are looking at several leading indicators to inform us when we start scaling it further. My philosophy is always to nail before scaling. So we are still going to be in the face of maximizing the ability to engage with these companies. We also have a different propensity-based engagement model with another 5,000-or-so accounts based on their propensity to spend, based on their demographic, their usage of certain aspects of our platform and so forth. So think of them as 5,000 customers that look like our top 3,000 customers who have the propensity or the potential to be Scalers+ or spend $100,000 or more on our platform. We are proactively engaging with them and bringing the goodness of our platform to these customers. So between these two, I expect us to be busy for the remainder of the year. We are still trying to ensure that we have the right sales enablement model, the right sales rep productivity metrics and things like that before we plan to expand that, because we are getting to a point where we can predict exactly what the productivity of a single rep can be and making sure that we are able to scale that to a reasonable degree will give us the confidence to invest more in the future. But for this year, we want to ensure that we are nailing these two motions.

Your next question comes from the line of Josh Baer from Morgan Stanley. Your line is open.

Great. Thanks for the question. Really interesting dynamic to explore the alternative financing, if it would enable growth to accelerate beyond your current outlook. Just wondering what you're seeing from the supply constrained side, if you could maybe touch on GPUs, but also more broadly on the leasing market, how tight it is and how that might come into things?

Yeah, Josh, on the supply side, we remain kind of, I'd say, in a real healthy position from a supply standpoint. We don't order GPUs or CPUs in such massive quantities that we're having to get in line behind super large orders. And in general, the market, as I'm sure you guys have heard, it's a lot less supply constrained from a GPU standpoint than it was last year. So we've not had any issues with getting new capacity. And we have a variety of sources. We've got four different global OEMs that we can access both NVIDIA and AMD GPUs from, and clearly a lot of sources for CPU. So we don't really worry too much about the supply chain side on the infrastructure side. In terms of the leasing alternatives, there's a tremendous amount of interest from whether it's PEs or its other kind of capital providers to enter into kind of leasing or similar arrangements. There's a lot of money that -- around the globe that is wanting to put to work in support of AI infrastructure in particular. But certainly, in our case, it would be AI and GPU and CPU. So there's a lot of different alternatives. And part of the reason that we're bringing it up now proactively is that we're engaging in some of these calls, and it gives us the ability to talk to a lot of different people and explore options. I just want to reiterate, though, we don't need to do this to deliver the growth rate that we're delivering now. We generate a ton of cash. We've got a really good free cash flow profile. We're going to take care of our balance sheet and the convert by the end of this year, we're in a very, very good position. This would enable us to grow faster than that without having to compromise the near-term free cash flow. So that's why we're interested in and we think there's a lot of counterparties out there that would be supportive of that kind of incremental addition to our funding strategy.

Great. Thank you.

Your next question comes from the line of Mark Zhang from Citi. Your line is open.

Hey, great. Thanks, guys, for taking the question. So, obviously, nice to see the NDR improvements and traction with the enterprise cohort. But really, you're holding, I guess, like, S&M or sales and marketing spend pretty steady. So can you, number one, give a sense of how you're really able to achieve this incremental level of leverage especially given the new programs you're already running, and I guess, like customer behavior changes relative to your expectations. And number two, how should we really think about the expense trajectory from here? And when should we maybe see an acceleration of the sales and co-market investments? Thanks.

Yeah. So, I can start, Mark. Thank you for the question. So, I just answered the question from Kingsley on sales and marketing and our philosophy to investment there. I think we're early in the cycle in terms of understanding the best ways to serve our customers. Largely, our customer acquisition engine has been from self-service funnel. And now we are just expanding it to additional motions like adding a channel partner program, getting a small but mighty team in terms of AI outbound sales and also expanding a couple of other partnership funnels. But we are learning very, very rapidly what it takes to, a, bring in new business through these channels, but also leverage this named account model and farming to expand the footprint of our existing customers. So there's a lot of learning ahead of us in the spirit of nailing some of these unit economics, so that we understand exactly what the points of leverage are and feel conviction to invest behind this to drive expansion even further. And we also want to be appropriately cautious given what our customers are dealing with in today's economic climate. I believe there are two major factors that are going on. One is the economic dislocation that is happening, but also more importantly, a technology dislocation, which is largely positive for digital native customers and they are going to be more technology hungry as part of this. So we are very cautiously observing these things, and we will invest at the right time behind the right unit economics to get more leverage and drive expansion and new business appropriately.

As we are at the top of the hour, I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's conference. You may now disconnect.